EXCLUSIVE: Ernst & Young to oversee high-stakes review of Citibank transactions, sources say

By Guest Contributor
April 13, 2012

By Brett Wolf

NEW YORK, April 12 (Thomson Reuters Accelus) - Citibank has retained Ernst & Young to supervise a regulator-mandated review of the bank’s transactions that will seek to determine the degree to which alleged compliance failures allowed drug traffickers or other criminals to launder money, sources familiar with the arrangement said.

The results of this high-stakes process will likely play a key role in determining the size of any fine the regulator ultimately levies against the South Dakota-based bank, the sources said.Last week, the Office of the Comptroller of the Currency made public a cease-and-desist order against Citibank as part of a settlement agreement with the firm. The order, which was dated April 5, charged that an examination had revealed that the bank failed to comply with Bank Secrecy Act regulations that required it to detect and report to authorities suspicious transactions.

In addition to requiring Citibank to bolster its anti-money laundering (AML) compliance program, the order gave the bank 30 days to hire “one or more independent consultants” to “supervise and certify” a review of its historical transactions, a process commonly known as a “look-back.” The purpose of a look-back is to determine the scope of the suspicious transactions that flowed through a financial institution with purported AML weaknesses.

Citibank agreed with the OCC to improve its anti-money laundering operations, but it did not admit or deny any wrongdoing. It was not fined, but the order left open the possibility that fines could be levied in the future.

COMPLEX, COSTLY PROJECTS

A consulting firm hired to oversee one of these complex projects typically subcontracts former law enforcement officials, regulators and others to investigate thousands of transactions that occurred during a period of several years chosen by regulators, and any previously unreported suspicious transactions that are unearthed are reported to authorities.

Look-backs, which have become common parts of regulatory actions in anti money-laundering cases in recent years, generally cost $10 million to $20 million to complete, but occasionally have run upwards of $100 million, a source with a decade of experience conducting look-backs told Thomson Reuters.

The Comptroller of the Currency office’s order did not state which year’s transactions must be scrutinized during Citibank’s look-back, but it cited “self-reported” compliance failures that occurred between 2006 and 2010, suggesting the focus will be on that era.

Ernst & Young, one of the world’s largest accounting and consulting firms, will oversee the project for Citibank, sources familiar with the arrangement said. When asked to confirm the deal, a spokeswoman for Citibank declined to comment. An Ernst & Young representative did not immediately return a call seeking comment.

Ernst & Young has experience conducting high-profile bank look-backs. For instance, Ernst & Young, with help from Deloitte, recently completed the look-back that the OCC ordered HSBC Bank USA to undertake in 2010 in relation to purported anti money-laundering lapses in its global banknotes and foreign correspondent banking operations, sources say.

CROSS-BORDER MONEY FLOWS

Among other things, the OCC order against Citibank stated that it did not adequately monitor the remote deposit capture and international cash letter instrument processing activity in its foreign correspondent banking business and as a result failed to report suspicious cross-border money flows to authorities when they occurred.

Such services facilitate the international movement of funds between financial institutions, including high-risk entities such as money-changer outfits in Mexico and Central and South America.

Drug cartels in Mexico and elsewhere have been known to abuse such services to funnel into U.S. bank accounts billions of dollars worth of traveler’s checks, money orders and other monetary instruments purchased overseas, law enforcement sources told Thomson Reuters.

The OCC order required that the consultant or consultants hired by Citibank to supervise its look-back have expertise in the review of cash-letter services and remote deposit capture activity.

HIGH STAKES

The OCC cited similar anti-laundering lapses in enforcement actions issued against Wachovia Bank (now part of Wells Fargo) and HSBC in 2010. The OCC levied a $50 million fine against Wachovia, which also entered into a deferred prosecution agreement with the Justice Department in which it admitted inadvertently allowing Mexican money changers to funnel drug cartel money into the U.S. financial system and agreed to forfeit $110 million. While HSBC has not been fined to date, it remains under investigation by the OCC, Justice Department and several other government agencies.

A former OCC examiner said the size of the fine a bank faces for AML lapses is based in part on the number of suspect transactions it failed to report to authorities on a timely basis; the more suspicious transactions that were not reported at the time they occurred and must be reported retroactively as part of a look-back, the larger the fine.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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